The answer to the question of what makes for ‘good liquidity’ is not a straightforward one. Nevertheless, assessing the diverse perspective on the topic is not just useful, but essential, agreed experts speaking at the TradeTechFX conference on Tuesday.
One panellist highlighted that “really unique liquidity that you can only get in one place” is advantageous and another added that in his opinion the characteristics of good liquidity are “market makers who are present and do client to client type of matching well”.
From the buy-side perspective, Tom Gentile, director of trading, Crabel Capital Management, cited the answer as “consistency and predictability”, while Nick Bonamo, head of trading at systematic macro fund Kepos Capital, added that for him the ideal description is “consistency but at low cost and low impact”.
Read more: Uninterrupted liquidity in FX top of the buy-side market structure wishlist
Tapping into the diversity of the responses, Drew Niv, chief strategy officer at ATFX, highlighted the fact that the priorities for individuals and firms very much depend on the context at hand – in particular when it comes to the foreign exchange sphere.
He explained: “Different things matter more to different people. If you’re trading major currencies, then cost and slippage matter a lot more. If you’re trading emerging market currencies, then market impact matters 10 times more than those things.”
Ultimately however, the conversation of course boils down to getting the best liquidity – whatever that may be.
Avoiding potholes
When it comes to the empirical side of the coin, more than ever, the buy-side is getting into the weeds of the decisions behind liquidity provision, highlighted Blaise Sheppard, head of FX at OneChronos.
“Having that collaborative discussion with banks is happening more and more. Questions like ‘what are you doing for venue selection?’, ‘How are you rounding this trade?’, ‘What’s going into the construction of how you execute?’. That wasn’t as much of a conversation a few years ago, and it’s becoming much more frontline for everybody as opposed to just the ones that are living and breathing it all day, every day.”
Speaking to the reasons behind this shift, Sheppard explained that it’s a macro shift – with more availability of data and more electronic venues making it easier than ever to achieve transparency.
Similarly, Bonamo further asserted the benefits of the increased presence of analytics, particularly when it comes to avoiding potholes.
“Some of the best insights that we’ve had that have improved our execution over time have not come from finding a path toward perfect execution, but rather in doing all this hard work with the data and analytics and finding the mistakes pitfalls.
“[…] Avoiding mistakes is sort of priority number one – like not hitting the worst pothole on a highway. You don’t have to be a perfect driver, but if you just don’t damage your car, that’s a really good start – analytics can point you in that direction.”